Back in a few


Loyal readers,


As some of you may know, Foxy Lady and I are picking up the family and relocating them from California to North Carolina.  We’re super excited about the move and it’s a great opportunity for us.  However, if you’ve ever moved, you know there are a ton of things you need to do.

That’s the rub.  So I am going to take a bit of a break from writing posts to focus on the move and getting to little cubs moved 2500 miles.  I should be back in a couple weeks so check in every once in a while.

Until then, see you on the flip side.

Fun times with the Federal Reserve


Nothing gets stock markets so excited as the Federal Reserve.  The United States’ central bank, with a couple well chosen words, can send markets up or down hundreds of points in a matter of minutes.  It’s even entered the investing vernacular as “Fed Watching”.  Alan Greenspan and Ben Bernanke and Janet Yellen have become household names.  But why is the Fed so important?  What is it doing that sends the markets into such frenzies?

Basically (and this is very basic, as there is a boatload of nuisance in this) the Federal Reserve, and for that matter the central banks of any country, control the core interest rate.  That single, yet enormously powerful tool, allows the fed to influence the economy in a major way.

The guiding mission of the Fed is first and foremost to maintain a healthy level of inflation.  In the US that is around 2-3%.  Being too low has some problems that reasonable people can debate, but pretty much everyone believes that when inflation gets too high, that’s when really bad things happen.  So more than anything, the Fed is tasked with keeping inflation low.  Then a secondary goal is to promote a healthy and growing economy that keeps unemployment low.  So basically the Fed has two jobs, keep inflation low and keep the economy strong.


How does the Fed impact the economy?

Let’s imagine a really simple economy.  There are ten companies named A and B and C all the way down to J.  Just like in real-life, not all companies are created equal, with some being much more profitable than others.  Here A is the most profitable (maybe like Apple) while J is the least profitable (maybe like JC Penney).

Interest rates will play a big part in the profitability of these firms.  As interest rates go up, the amount they spend on interest for all their debt goes up as well.  Because A is so profitable, it would only start to lose money if interest rates went really high, up over 10%; however J is much more vulnerable and will become unprofitable if interest rates go over 1%.  All the other companies have a similar situation as shown in the graph.


So this is where the Fed comes in.  Let’s say the Fed sets the interest rate at 6%.  Firms A, B, C, D, and E are all profitable even when the interest rates are that high; but firms F, G, H, I, and J are not.  Because of that things won’t look good for firms F-J.  Maybe it’ll be so bad that they’ll go bankrupt or maybe they’ll lay off people or put a hiring freeze on.

At 6% interest, you have five firms that are doing well (A-E)—growing, hiring more people, expanding, etc.—and five that aren’t (F-J).  And at 6% the economy is performing at a certain level.  But what would happen if the Fed lowered the interest rate from 6% down to 5%?  One more firm (F) would be profitable, and in general it would benefit all the firms.  The profitable ones would be doing even better, and the unprofitable ones wouldn’t be quite so bad off.  And that would lead to a strong economy: more “stuff” would be produced and more people would be employed.

So there is very clear relationship that lower interest rates led to a stronger economy.  Having a strong economy is one of the Fed’s goals, so that begs the question, “Why doesn’t the Fed push rates all the way down to 0%?”

This is where it starts to get interesting.  It’s my favorite topic: Inflation.  Remember that the Fed’s first job is to control inflation.  Let’s look at the Fed’s decision to move interest rates from 6% to 5%, but now look at it with an eye towards inflation.

In our pretend world, let’s assume at 6% interest rates the economy is doing well.  Things are growing and unemployment is fairly low.  When interest rates go to 5%, firm F will become profitable so they’ll want to hire some people—makes sense.  But remember that unemployment is low, so F is going to need to tempt people who are already working for A or B or C or who ever to come work at F.  How does F do that?  They pay them more.

F starts to pay people more, but A doesn’t take this lying down, so A starts paying more.  This wage increase trickles through the economy.  But A and B and even F need to make money, so the increase in compensation they’re paying to their employees gets passed along to consumers in the form of higher prices.  When prices start rising, that’s INFLATION.  And controlling inflation is the Fed’s #1 goal.  So that creates the difficult balance for the Fed—they want the economy to do well but not so well that it triggers inflation.

So there you go.  You just completed a course in “Introductory Macroeconomics”.


What’s going on today?

Now that you have that little lesson under your belt, how does that relate to what’s going on with the Fed right now?  Currently, the Fed has interest rates at historic lows, at about 0%.  Obviously that’s super low, so shouldn’t the Fed be worried about inflation?

Remember the circumstances of how interest rates got that low.  At the beginning of 2008 the economy was going strong and the interest rate was at over 5%.  But then the financial crisis hit, blowing up the banking industry, and sending the world economy into a very sharp recession.  A ton of people lost their jobs (unemployment went up) so prices stayed flat or even started to fall a little bit.

With all this going on, the Fed threw a life raft to the economy in the form of near 0% interest rates.  In the intervening years, the economy has rebounded and unemployment has fallen, but inflation has remained pleasantly low.  This is kind of the best of both worlds for the Fed—the economy is strong and there’s no inflation.  The two things they have to balance are both in happyland, so they have kept interest rates low.

But what keeps them in the news is “the specter of inflation on the horizon.”  If you follow this stuff (like I do) in the past few months, every time inflation numbers come out, everyone looks at those and tries to predict what the Fed will do.  Earlier in the year when it looked like inflation was picking up, everyone thought and the Fed confirmed that it would probably start to raise rates.  However, in recent months, inflation has reversed and stayed low, allowing the Fed to keep rates low.  This is the drama that has been playing out for the past 6 months.

Every time this happens the market swings like a pendulum.  If rates are going to go up, the stock market gets crushed because firms will be less profitable (as we saw in the lesson above).  If that changes and we think rates are going to stay low, the market shoots up like a rocket.


What does it really mean when the Fed changes interest rates?

With all of this, are we just a bunch of idiots?  Should we really be so happy if the Fed is keeping rates low, and should we be so bummed if the Fed raises rates?

As the parent of two boys who one day may start sponging off Foxy Lady and me, I think the parent-child relationship is a good analogy.

Imagine you have parents (the Fed) who have a grown child (the US economy).  Times are tough for the child (the economy is doing poorly) so the parents help out (the Fed lowers interest rates).  The good scenario is that the child starts doing better to the point where he doesn’t need his parents’ help (the economy strengthens so it can withstand higher interest rates).  The bad scenario is the child becomes dependent on his parents’ help and is never able to make it on his own.

In this analogy the parents reducing the amount of help they give (the Fed raising rates) is a good thing, isn’t it?  It means that the kid is getting things on track and is standing on his two feet.  For this reason, I actually think it’s a good thing if the Fed raises interest rates because it means that the economy is strong enough that it doesn’t need insanely low interest rates any more.  Yet the markets react in the exact opposite direction.

I get it.  Just as the kid would be bummed if the parents said, “hey pal, since you’re starting to make some money now, we won’t be sending those monthly checks”, the companies are bummed that they can’t borrow money so cheaply.  But that isn’t sustainable.

I chalk this up to yet another of a million examples of how the stock market acts in a goofy manner in the short term.  And another reason why I NEVER try to time the market.  I just keep my head down and invest for the long term, regardless of what is going on with interest rates.  But watching everyone hang on Janet Yellen’s every last word does make for perverse entertainment.


As the current debate unfolds, what do you think?  Is the economy strong enough for the Fed to take away the credit card?


Picking when to take Social Security


In the United States, Social Security is an important part of most peoples’ retirements, actually probably too important in many instances.  Social Security is a fairly simple program that was designed to be pretty idiot-proof.  You don’t really need to make many decisions for it, which contrasts sharply with all the decisions you need to make on your other investments (like tax strategies, asset allocation, picking investments, etc.).

With Social Security, you just work and the government takes its 12.4% (6.2% from you and 6.2% from your employer) of your compensation.  In fact, you don’t really have a choice in the matter and the government does it automatically.  Then when you get old, the government gives you a monthly pension.  Not real complicated on your end.

However, there is one really important decision you need to make regarding Social Security: when you start taking it.  Basically, you have three options: 1) Early retirement-when you turn 62; 2) Regular retirement-when you turn 67 for most of us; 3) Late retirement-when you turn 70.  And as you would expect, if you start taking Social Security later, you get a larger monthly check from the government.

This is obviously an important choice to make, and it’s one that gets a lot of press coverage with all sorts of people opining on what to do (I guess with this post, I am adding my opines to those ranks).  Generally speaking, the advice slants towards taking it later.  Yet, I wonder if that’s really good advice.  Using my handy-dandy computer, let’s go to the numbers to see what they tell us.


I checked my Social Security statement and I’ll be able to pick from one of the three choices:

Age to start taking Social Security

Monthly check

Early retirement—age 62


Full retirement—age 67


Delayed retirement—age 70



As you would expect, the answer to this riddle is a morbid one.  When do you expect to die?  The longer you live, the more it makes sense to delay taking Social Security so you can get the bigger check.  That’s not a tremendous insight, but when you do the math, you start to see some interesting things going on.  I fully appreciate that Social Security is very nuanced and complex, so I am just covering the simple basics here.

In my analysis to be able to compare the different scenarios, I assumed that I saved all the Social Security checks and was able to invest them at 4%, about the historic rate for a bond.  If you do that the table above expands to this:

Age to start taking Social Security

Monthly check

Highest value

Early retirement—age 62


Die before age 79

Full retirement—age 67


Die between age 80 and 84

Delayed retirement—age 70


Die after age 85



That’s pretty profound actually.  The average life expectancy in the United States is 76 for men and 81 for women.  Doesn’t that mean that most of us should be taking Social Security with the early option?  That contradicts most of the advice out there on this topic.  That, ladies and gentlemen, is why Stocky is here for you.  This is where it starts to get fun, and we can apply a little game theory (awesome!!!).


When to start Social Security?

Actually, once you reach age 62, the life expectancy of those still alive (and able to make the decision on Social Security) is 82 for men and 85 for women.  This makes sense because you’ve survived to 62 so by definition you didn’t die before then (awesome insight, Stocky), and those early deaths pull down that initial life expectancy model.

Since women are better than men as a general rule (Foxy Lady took over typing for just a second there), let’s look at this decision as a 62 year-old-woman.  She needs to make a decision on when to take Social Security.  She knows her life expectancy at this point is 85, which means there’s about a 50% chance she makes it to 85.  So the worst choice for a 62 year-old is to take the early retirement option.  She’s probably going to live long enough that either full retirement or delayed retirement is the better option.

At 62 she does the smart thing, and decides to wait.  Her next decision comes at age 67, assuming she lives that long (there’s about a 5% chance she’ll die during those five years).  But a similar thing happens—when she was 62 her life expectancy was 85 (right on the border of picking between full retirement and delayed retirement), but now that she’s 67 her life expectancy jumps up a year to 86.  So if she makes it to 67 then she’s better off taking the delayed retirement (of course, there’s about a 4% chance she’ll die before she makes it to 70).

That’s a little bit weird though, isn’t it?  It kind of feels like you’re that horse with a carrot dangling over his head, keeping him walking forward.  It’s a bit of a conundrum.  At any given time, you’re better off delaying starting your Social Security, so the math tells you to keep waiting and waiting.  But if the dice come up snake eyes and you die, then you miss out on everything (not strictly true, but true enough for our analysis).

And keep in mind that since Foxy Lady hijacked Stocky’s computer, we’ve done this analysis for women.  The math tells you that it’s just about a wash between taking Social Security at 67 or 70.  Since women live on average 3 years longer, for men you would think it means that the advantage leans towards taking it early.


What does it really matter?

So the analysis tells us that we’re better off waiting if you’re a woman and it’s really close if you’re a man.  And of course the longer we wait, the further we come out ahead by taking delayed retirement instead of early or full retirement.  But how big of numbers are we talking?

Remember, the cut off for when full retirement becomes better is at about 80 years old.  The cut off for when delayed retirement becomes better is about 85 years old.

Future value of Social Security payments


Early retirement (62)

Full retirement (67)

Delayed retirement (70)














Those are meaningful differences.  If you make it to 100 years old, delayed retirement comes out about $800,000 higher than early retirement.  However, those are in future dollars, 38 years into the future if you’re 62 today and faced with this decision.  That $800,000 when you’re 100 would be worth about $370,000 today.  Of course that’s if you make it to 100, which isn’t really likely (about a 3% chance).

If you make it to 90 years old (you have less than a 30% chance) then the difference is about $260,000 in future dollars which is about $150,000 today.


Wrapping up, I’m really torn on this.  There’s a little bit of a prisoner’s dilemma type thing working that keeps making you want to push back when you start collecting.  And then when you look at the upside of delaying retirement, the numbers are pretty big (whenever you’re talking about hundreds of thousands of dollars, that’s real money), but the chances of us making it to that super-golden age are pretty small.

I suppose it’s best to wait, but I’m giving that a pretty “luke-warm” endorsement.  Actually, I think the way the Social Security administration sets it up, the options are all pretty similar.  We all have this personal belief that we’ll live longer than average (but not everyone can live longer than average, expect if you’re from Lake Wobegon, MN).  And that makes us think we’re better off waiting, but it probably is all pretty equal.

Too many eggs in your company’s basket


A common question investors have is “How much of my investments should be in my company’s stock?”  Many of us work for publicly traded companies (Stocky works for Medtronic and Foxy Lady used to work for Pepsi).  Many of those companies include stock as a significant part of their employees’ compensation.  So what is an omnivore to do?  The short answer is: Don’t invest a lot in your employer.


It adds up

The general thinking among companies is that it’s good for their employees to own company stock.  It motivates them to work hard, so then the company does better, which then raises the stock, and that finally makes the employee richer.  See everyone wins.

My sense is that before 2000 compensation in the form of stock was much more prevalent.  I can speak to my experience at Medtronic:  The default for your 401k investments was Medtronic stock.  When they did the 401k match, the match was in Medtronic stock.  They also have a program where you can buy Medtronic stock at a 15% discount compared to the market price.  You had the option to take your bonus in cash or get a larger bonus in Medtronic stock options.  Long-term incentives are given in stock and options.  High performers can get awards of stock or options.

I don’t think Medtronic is all that different from most companies.  And you can imagine that adds up to the point where a very large portion of your portfolio is in your company’s stock.  The Fox family has about 15% of our portfolio in Medtronic stock and I think that’s way too high.  Anecdotally, a lot of my coworkers have 50% or even more of their portfolio in company stock.  Over the past 6 months or so I’ve been selling Medtronic stock to lower that.  Of course, we have to have a minimum amount in stocks just because some of those options and stock awards haven’t vested, but what we can sell, we have.


What difference can you really make?

The company wants you to do it because collectively if a lot of their employees own stock, they are probably motivated to do better.  But as an individual, what difference can you really make?  I know that sounds anathema, like when people say they don’t vote because one vote doesn’t make a difference (I do vote in every election, but the way).

Let’s think about that for a minute.  Stocky works at Medtronic, a company which has about 50,000 employees and earns $17 billion each year.  Actually, I think I do really good work, and let’s imagine that because I worked my furry little tail off, I was able to develop programs that led to an extra $2 million in sales.  That’s a lot actually (I think I might be underpaid), but compared to the bigger picture, that such a tiny drop in the bucket that it wouldn’t affect Medtronic stock in any possible way.

On the other hand, if I bust my tail and work hard, my bosses will see that and I’ll get a raise and a promotion.  That’s where the real upside for me is.  Not in the impact on the stock.  I’m sorry to say that, but it’s true.  The payoff in owning stock (compared to owning a diversified mutual fund) just isn’t there.  But the downside is very real if things don’t go well (more on this in a second).

Since Medtronic is a really huge company, maybe an individual can’t make much of a difference.  But wouldn’t an individual employee be able to have a bigger impact on the company’s stock if they were at a smaller company?  Maybe it makes sense for people in smaller companies to own more of their company stock for that reason.

The logic is sound—certainly if you work at a smaller company your individual contributions will have an outsized impact.  But the negative is that your risk goes up as well.  Larger companies tend to have greater margins for error when things go bad.  If you’re in a smaller company, the risk of bankruptcy or some other catastrophic event with the stock is so much higher.  And remember, as an investor you’re looking to lower risk not raise it.  So with all this I don’t the think argument for an individual to be a shareowner so they can drive the stock upwards holds a lot of weight, especially when you compare it to the downside.


What happened to loyalty?

If you own a lot of your employer’s stock, you’re violating the first rule of diversification.  The whole point of diversification is to make sure that one company or one sector or one “something” can’t hurt you too much if everything goes to hell.  Think about that with your own company.  The single most valuable “financial asset” you have is probably your career and the future earnings that go with that.

Now imagine that something goes terribly wrong with your company (a product recall, losing a lawsuit, missing the boat on a market trend, etc.).  If you’re an employee that sucks because you’ll probably get smaller bonuses and raises; at the extreme you might get let go.  If you’re a shareholder that sucks because the value of your stock will go down.  If you’re an employee and a stockholder you get the double whammy.  That is what diversification is trying to save you from.

But wait a minute.  I can hear some people say stuff about loyalty and having faith in your company and putting your money where your mouth is.  To that I say “hooey”.  If you’re working hard every day to help your company succeed, isn’t that loyalty and faith?

Remember that your portfolio is ultimately meant to support you in your life’s goals.  For most of us that probably means securing a comfortable retirement.

Just to put things in perspective, in 2013 there were a total of 7 stocks that got removed from the S&P 500 because of “insufficient market capitalization”.  That is French for “the stock went down so much the company wasn’t considered S&P 500 material any more.”  7 stocks out of 500 doesn’t seem like a lot but that’s about 1.5% of the entire index.  And remember that the S&P 500 as a whole was up 29%!!!  That was an awesome year for the entire index, yet still 7 companies couldn’t make the cut.  Imagine what would happen in an average year or even a bad year.

Let’s think about the fate of the employees at those companies for a second.  Being kicked off the S&P 500 is a bit of a slap in the face so you know things at the company aren’t good.  There’s probably a lot of things happening like stores closing, people being laid off, salaries being frozen, moratoriums of new hiring so the existing employees have to work more.  Just a bunch of bad stuff, right?  So if you’re working there life probably isn’t awesome, and the idea of polishing up your resume is probably pretty top-of-mind.

Now imagine all that is happening while a big portion of your portfolio is taking a dive (remember, these companies got booted off the S&P 500 because their stocks went too low).  Ouch.  That is definitely rubbing salt in the wound.  In the investing world managing risk, and minimizing it where you can without impacting your return, is super-duper important.  When you own a lot of stock in your company, you’re just taking on unnecessary risk.


So there we are.  There’s definitely some romantic notion of owning stock in the company you work for.  It seems like the right thing to do.  But you’re just taking on risk needlessly.  My advice is that you should really keep that to the absolute minimum.  In the Fox household, we sell the Medtronic stock when we can.  It’s not that we don’t think it’s a great company (it is) or we don’t have faith in its future prospects (we do).  It’s just we don’t want to bear the risk that something really bad could go down, leading to me possibly losing my job just as your portfolio is doing a belly flop.

How much of your portfolio is of your company stock?

Top 5: Reasons we are in the golden age of investing


You hear all the time that this is a terrible time to be an investor.  Maybe it’s after the fallout of some scandal, Enron and Worldcom from the early 2000s or Bernie Madoff from 2008 come to mind.  Or maybe it’s that the market is evolving and people caught on the wrong side of that start to complain.  Last year Michael Lewis published Flash Boys which looked at high frequency trading.  One of the takeaways was that Wall Street giants were rigging the game to their advantage at the cost of smaller investors.

flash boys

I’m not an expert on high frequency trading or the million other death knells that people always point to when showing that the market is all screwed up.  The eternal optimist, I actually think this is a great time to be an investor.  Here are my top 5 reasons why we are in the golden age of investing.


5. Decimal stock prices: Today if you look up the price for a stock you get something normal looking like $40.63. However, before 2001, stock prices were quoted in fractions, so that same stock wouldn’t be $40.63, it would be 40⅝.  First off, that was a royal pain the butt.  Quick, which would cost more $20.30 or 20⅜? (20⅜ is more).  We all remember fractions from elementary school, but they aren’t really intuitive in financial applications.

Secondly, it cost you real money.  All stocks have a bid/ask spread which is the difference between what someone will sell something for and what they will buy it for.  That difference is the profit that market makers get.  As an investor you pay that spread, so the larger the spread the worse for you and the better for them.  When stocks were in fractions, just the nature of fractions made the spread fairly large.  So you might have an bid of 20⅜ and an ask of 20½.  That’s a spread of 12.5 cents for every share you trade.  That may not seem like a lot, but over hundreds or thousands of shares that starts to add up.

When stocks became decimalized, that 20⅜ became $20.38 and that 20½ became $20.50.  But then competition among market makers squeezed the spread to something like $20.41 and $20.42.  It’s not uncommon to see spreads of only a penny (see a recent quote I pulled up for Medtronic).  That is real savings that goes into your pocket.  In 2001 the SEC mandated all stocks be quoted in decimals and that was a real win-win: investing became computationally easier and less expensive.

Medtronic chart


4. Internet trading: You could have a whole post on how the internet has revolutionized personal finance (hmmmm, maybe I’ll do that). But here I’ll focus on internet trading and generally managing your investments online.  When I started investing in the mid-1990s the main way you invested was by calling your broker and having her execute the trades you wanted.

Think about that for a second.  You had to call someone, hope they answered, tell them what you wanted to do, and then have them do it.  That just seems really inefficient.  Later, some mutual fund companies got to the point where you could trade using your touch-tone phone (“press 1 to buy shares, press 2 to sell shares”), but even that was pretty kludgy.

Of course, once the internet came out, investing proved to be one of the ready-made applications for cyberspace.  You could actually see your investments on a screen, in real time, push buttons to do what you wanted.  Even set up things like automatic investments or withdraws.  No question, it’s so much easier now than it was.


3. Low costs: With the internet and the incredible efficiency it brought, the costs of investing plummeted. Brokerage fees on some of my first trades were in the $50-75 range.  That was with a full-service broker.  Also there were ways that they nickel-and-dimed you with things like “odd lot hikeys” which was an extra charge if you bought less than 100 shares.  Such a bunch of crap.

That was about the same time that “discount brokers” were becoming popular and started offering internet trades for $14.95.  Once that genie got out of the bottle, there was no end to how low trades could go, and it made sense.  All the stuff became automated, so the costs dwindled to almost nothing.  Now you can find $4.95 trades and places like Vanguard offer $2 trades if you know where to look.

Think about that for a second.  If you did 10 trades a year, in the old days (dang, that makes me sound old) that would have cost you $1500 per year (remember you get charged for buying and selling).  Over an investing career, that $1500 each year could add up to almost a quarter of a million dollars!!!  Maybe Michael Lewis will complain that investors are getting swindled out of a penny or two a share because of high-frequency traders, but that’s a drop in the bucket to what they’re saving by tiny, tiny trading costs.


2. Computing power: As reader Andrew H said in a comment, technology has advanced so rapidly that your iPhone has much, much more computing power than the Apollo 11 spacecraft. Computing technology has become amazing powerful and amazingly cheap in the past couple decades.  A $300 laptop with Excel can allow you to do amazingly large and complex analyses that would have seemed magical just 30 years ago.

One of the huge applications for this analytic power is personal finance and better understanding the stock market.  Many of my posts on this blog are just that—taking data and using Excel to make sense of stuff.  Are you better of investing a windfall at once or over time?  How often would you have lost money in the stock market historically?  Those are fairly large analyses that would have been a massive undertaking 30 years ago, probably only possible at a major investing house or a university.  Today, they’re done by a nerd with a cheap computer and too much time on his hands.

That computing power has been an amazing equalizer on the financial playing field.  Now individual investors can figure things out for themselves instead of having to listen to brokers like they were priests from some secretive cult.  That’s an enormous improvement.


1. Access to information: This is a biggie. The amount of information available to us now with the internet is mind-boggling.  When I was a kid your source of information on stocks and investing was the evening news (“stocks were up 52 points today”) and the newspaper where you could look up the price of a stock from the previous day.  That was it???  That was it!!!

Today you have real-time price quotes, you have real-time news, you have real-time analysis.  You also have troves of data, and nearly all of it is free.  All the analyses I have done is with free data on historic stock prices and inflation.  That’s nice if you’re a dork like me, but how does this help normal people?

In investing, information is power, and we live in a time where that power is freely given to all.  Let’s say you wanted to invest in Ford in 1990.  How would you go about researching your investment decision?  Maybe call Ford’s investor relations to have them mail you some annual reports, possibly go to the library to find some articles on the company, probably stored on microfiche.  That’s crazy.  Today you can find all that information plus about 1000 times more in less than 5 minutes on your computer.  It truly is a completely different ballgame, and one that is very much to our advantage compared to what it had been.


Bonus reason—financial understanding:  I couldn’t stop at five reasons, so I am including a sixth (the “Top 6” just doesn’t have the same ring).  There has been tremendous research into financial markets and how they behave over the last couple decades.  While markets are still very unpredictable by their nature, we understand them much better.  Ideas like price-to-earnings ratio, index mutual funds, efficient markets, and a thousand others help us better understand how and why the stock market does what it does and that allows us to be better investors.

In a similar vein, the central bankers who guide our economy, and by extension the stock market, have learned a lot too.  One of the theories on why the Great Depression was as bad as it was is because President Hoover and his advisors did all the wrong things.  It’s not that they were vindictive and wanted to drive the country into a calamitous financial train wreck, but they just didn’t know what to do.

I absolutely believe the reason we haven’t had another Great Depression, including the Great Recession where we emerged largely unscathed, is because our central bankers are a lot smarter.  Paul Volker, Alan Greenspan, Ben Bernanke, and Janet Yellen all studied the Great Depression and other financial disasters and learned what those people did wrong and how similar fates can be avoided in the future.  That understanding has saved us a lot of pain.


So there you have it.  Sure, investing isn’t always a smooth path, and as Michael Lewis points out, there are always bad apples that are trying to screw things up.  But with all that, don’t lose sight of the fact that investing today is soooooooo much better than it has ever been before.

What do you think?  Are my glasses too rose-colored?  Are there other awesome developments that deserved a place in the top 5?